MICROECONOMICS

ECON 24 & BMGT 21

Economics is the study of how
individuals and societies choose to
use the scarce resources that nature
and previous generations have
provided. The key word in this
definition is choose. Economics is a
behavioral, or social, science. In large
measure, it is the study of how
people make choices. The choices
that people make, when added up,
translate into societal choices.
WHY STUDY ECONOMICS?

To Learn a Way of Thinking

To understand society,
To understand global affairs, and
To be an informed citizen
To Learn a Way of Thinking

1. Opportunity cost
-The best alternative that we forgo, or give up,
when we make a choice or a decision.

2. Marginalism
-The process of analysing the additional or
incremental costs or benefits arising from a choice or
decision.

3. Efficient market
-A market in which profit opportunities are
eliminated almost instantaneously.
To understand society
1. Industrial Revolution
-The period in England during the late eighteenth
and early nineteenth centuries in which new
manufacturing technologies and improved transportation
gave rise to the modern factory system and a massive
movement of the population from the countryside to the
cities.

To understand global affairs

-An understanding of economics is essential to an
understanding of global affairs.

To be an informed citizen
-To be an informed citizen requires a basic
understanding of economics.
The Scope of Economics
Macroeconomics
-The branch of economics that examines
the economic behavior of aggregates—income,
employment, output, and so on—on a national
scale.

Microeconomics
-The branch of economics that examines
the functioning of individual industries and the
behavior of individual decision-making units—that
is, firms and households.
The Diverse Fields of Economic
 METHODS OF ECONOMICS
Positive economics
-An approach to economics that seeks to understand
behavior and the operation of systems without making
judgments. It describes what exists and how it works.

Normative economics
-An approach to economics that analyses outcomes of
economic behavior, evaluates them as good or bad, and may
prescribe courses of action. Also called policy economics.
Descriptive economics
-The compilation of data that describe phenomena
and facts.
Economic theory
-A statement or set of related statements about
cause and effect, action and reaction.

Model
-A formal statement of a theory, usually a
mathematical statement of a presumed relationship
between two or more variables

Variable
-A measure that can change from time to time or
from observation to observation.
Empirical economics
-The collection and use of data to test economic
theories
Economic Policy
-Economic theory helps us understand how the world
works, but the formulation of economic policy requires a
second step. We must have objectives. What do we want to
change? Why? What is good and what is bad about the way
the system is operating? Can we make it better?

Four criteria are frequently applied in judging economic

outcomes:
1. Efficiency
2. Equity
3. Growth
4. Stability
efficiency
-In economics, allocative efficiency. An efficient
economy is one that produces what people want at the
least possible cost.

equity
-Fairness.

economic growth
-An increase in the total output of an economy.

stability
-A condition in which national output is growing
steadily, with low inflation and full employment of
resources.
The Circular Flow of the Economy
 BASIC ECONOMIC PROBLEM
1. What to produce
2. How much to produce
3. How to produce
4. For whom to produce
1. What to produce?

What does a society do when the resources

are limited? It decides which goods/service it
wants to produce. Further, it also determines
the quantity required. For example, should
we produce more guns or more butter? Do
we opt for capital goods like machines,
equipment, etc. or consumer goods like cell
phones, etc.? While it sounds elementary,
society must decide the type and quantity of
every single good/service to be produced.
2. How much to produce
2. How to produce?

The production of a good is possible by various

methods. For example, you can produce cotton cloth
using handlooms, power looms or automatic looms.
While handlooms require more labour, automatic looms
need higher power and capital investment.
Hence, society must choose between the techniques to
produce the commodity. Similarly, for all goods and/or
services, similar decisions are necessary. Further, the
choice depends on the availability of different factors of
production and their prices. Usually, a society opts for a
technique that optimally utilizes its available resources.
4. For whom to produce?

Think about it – can a society satisfy each and

every human wants? Certainly not. Therefore, it has to
decide on who gets what share of the total output of
goods and services produced. In other words, society
decides on the distribution of the goods and services
among the members of society.
 Three Types of Economic System

1. Traditional economic system

–production decision is based on customs and
traditions
2. Command economy
- answers to economic problems are dictated by
the government
3. Market system
-deals with the economic, problems by
considering consumers’ choices